Posted tagged ‘credit crunch’

Okay, I’m a huge fan of Research Recap, so don’t take this as “ragging” on them, but I was reading my feeds and came across this gem of a headline:

Synthetic CDO Issuance Down Sharply in First Quarter

Wow! Really? Apparently CreditSights, whom I have heard good things about, put out a report saying this. The money quote? Here it is…

The Cash flow CDOs that are being launched increasingly appear to be designed to help banks clean up their balance sheets rather than attempts to arbitrage the agency ratings.

And then there was this other gem in the post, quoting the report…

“Any widening, it was claimed, would rapidly be exploited by a wave of CDO issuance. The most important driver of this stabilisation was synthetic CDOs – specifically the idea that bespoke single-tranche deals could be placed with investors without the need to fill the entire capital structure and this protection selling would push spreads lower.”“Such arguments have been demolished by the events in the past 12 months with both synthetic and cash flow CDO issuance falling like a rock owing to a slew of economic, ratings, and funding concerns.”

So why is CreditSights (CreditHindSights, in this instance) releasing such a report, detailing what everyone with a minimal attention span and the ability to read a newspaper would be able to figure out for themselves? Oh, right …

The full report is available for purchase.

(link omitted)

I don’t think a firm needs to sell a report telling people interested in reading finance research that people aren’t buying CDOs like they used to, anymore.

Maybe their next report will analyze Bear Stearns most recent 10-K and detail some warning signs they see as troubling…

A story that hasbeen a focus for the debt markets, specifically as it relates to (corporate) credit debt markets, is the fire sales by C.S. of its stake in Harrah’s without coordinating with other banks. Indeed there is evidence that this wasn’t the first time C.S. got creative. The interesting thing about this turn of events is that these syndicates are put together to share risk and broaden distribution channels (some banks talk to accounts that others do not). Well, with the C.S. shenanigans creating a fire sale, leaving Harrah’s new bonds 7-10 points (cents on the dollar) lower and the loans being offered 5-6 points lower (estimates, market participants are rather cagey, but low 90s dollar price for the loans and 88 cents on the dollar for the bonds was widely noted in the marketplace) it seems like they made a good sale. Complicating the situation, of course, is the fact that they seemed to have caused the panic that led to the downdraft. Add to this technical overhang the lack of help from C.S. in distributing the remaining debt, and the fact that a sizable buyer was taken out of the market. It’s plain to see that C.S. worked against the syndicate and hurt the distribution power of the group.

Further, here’s an interesting datapoint: C.S. was reported to have around $30 billion in LBO debt on its books, around 10% of the estimate of $300 billion total LBO debt out there. Let’s assume all of this is too high by half (although why would journalists stress an extreme figure in a headline, hmm?). That leaves C.S. with around $15 billion. If, including Harrah’s, they sold $5 billion (rounding up all numbers in the previous Deal Journal post) but caused a 5 point decline in the market (assume it’s all loans they hold, no bonds, which suffered a more severe price movement), they lost $500 million. The figure includes $250 million that was saved on the loans they had already sold (overestimating their savings, since they only really “saved” that loss on Harrah’s, other sales occurred earlier). Ouch. But the remaining unsold LBO debt shed $7.5 billion in value (5 points on $150 billion) due to the sale, and ensuing panic. It seems that letting C.S. into the syndicate did anything but mitigate risk.

Because this situation has wreaked such havoc, perhaps other shops will actually take a stand and block C.S. from future syndicated deals. Their actions seem to show they can be relied upon neither to mitigate risk nor aid in distributing any.